Chapter 1/Ten Principles of Economics ? 33

Short Answer

1. How does the study of economics depend upon the phenomenon of scarcity?

ANS:

Since economics is the study of how society allocates its scarce resources, if there were no scarcity, there would be no need for economics. Everyone could have all the goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however).PTS: 1 DIF: 2 REF: 1-1 TOP: Economics | Scarcity MSC: Applicative

2. One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes

income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy. ANS:

Efficiency is the property of society getting the most it can from its scarce resources. Equity is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government.PTS: 1 DIF: 2 REF: 1-1 TOP: Tradeoffs | Efficiency | Equity MSC: Interpretive

3. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of

coming to class today? ANS:

Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.)PTS: 1 DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

4. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12

school year is extended to 11 months per year instead of the existing 9 months per year. ANS:

The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many teachers look at summers off as a major benefit of the education profession. If this benefit were eliminated or diminished, some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching.PTS: 1 DIF: 3 REF: 1-1 TOP: Incentives MSC: Analytical

5. Under what conditions might government intervention in a market economy improve the economy’s performance? ANS:

If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equitable distribution of economic well-being.PTS: 1 DIF: 2 REF: 1-2 TOP: Market economy | Government MSC: Applicative

6. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. ANS:

To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.PTS: 1 DIF: 2 REF: 1-3 TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

34 ? Chapter 1/Ten Principles of Economics